We have posted several pieces (see here and here) on how the expansion of
the Fed’s balance sheet is financed by reserve creation, which
are held by depository institutions in the form of excess
reserves and not circulating in the economy. In the chart below
we try and get a sense of how much of the quantitative easing has
leaked out of the banking system into the economy.

The monthly data in the chart below is the year on year change ($
billions) of total Federal Reserve assets less excess reserves of
depository institutions. Because the last observation of excess
reserve data is from December the chart doesn’t capture the
latest effects of quantitative easing.

Though the calculation is a bit noisy, the chart does illustrate
why the massive expansion of the central bank’s balance sheet has
yet to translate into a significant increase in inflation. When
credit begins to expand as the economy picks up the Fed will have
to execute what George Soros calls the
“delicate two-phase maneuver” and remove the excess liquidity
from the financial system.